Income Tax for Online and Marketplace Sellers

Do I owe income tax on what I sell online?

Online sales are taxable when they produce business profit or a gain on personal property. A marketplace payout is only cash sent to you: it may already have fees and refunds removed, and it does not show what you paid for the goods. Report income even if no tax form arrives (IRS: Understanding your Form 1099-K).

A married couple who co-own the shop without an LLC, file jointly and both materially participate can elect out of partnership treatment: each spouse files a Schedule C with the joint return, which makes the election. An LLC cannot use it; see How an LLC owned by spouses or family is taxed (IRS: Election for married couples).

If the activity loses money and its business status is uncertain, see Business losses.

What if I only sold my own used personal items?

If what you receive after selling costs is less than the item's cost, there is no taxable gain, but the loss cannot offset other income. If it is more, report the gain on Form 8949 and Schedule D. Gain on collectibles such as coins, stamps, art or antiques held more than a year can be taxed at up to 28%. Marketplace fees and other selling costs reduce what you received (IRS: What to do with Form 1099-K; IRS: Publication 550).

Keep the original purchase record and the sale record for each item. If the receipt is gone, use old bank or card statements or ask the original seller for a copy (IRS: Form 1099-K filing FAQs). If Form 1099-K includes a personal item sold at a loss, the IRS gives ways to show and offset the reported payment on Schedule 1 or Form 8949 so the form does not make the whole sale taxable. Keep gains and losses separate; a personal loss cannot cancel a gain on another item. If you bought items to resell, treat them as business goods rather than personal belongings (IRS: What to do with Form 1099-K).

What is Form 1099-K, and what if I got one or did not?

Form 1099-K reports payments processed for goods or services; it is not a tax bill or a statement of profit. A payment app or marketplace generally must send one when payments through that platform exceed $20,000 and exceed 200 transactions. Direct payment-card processing has no such federal reporting threshold. A platform may send a form below its threshold, and a state may have a lower reporting threshold (IRS: Understanding your Form 1099-K; IRS: Form 1099-K FAQs).

The form's gross amount can include fees, refunds and shipping that need separate treatment. Compare every form with the platform's transaction report and your sales records; add sales paid outside the platform and avoid counting the same sale twice. A missing form does not remove income from the return. Separate any gifts or family reimbursements from sales; they are not sales income (IRS: Form 1099-K common situations). If a form is duplicated, belongs to someone else, or has the wrong amount or tax ID, ask the issuer to correct it. Keep the form and correspondence, and file on time even if no correction arrives. If partnership sales appear under a partner's tax ID, ask the issuer to correct the payee, keep records showing the sales belong to the partnership, and report them on Form 1065. Check Box 4 and report any federal income tax withheld on the appropriate return (IRS: What to do with Form 1099-K; IRS: Form 1099-K filing FAQs).

How do I report sales, fees, refunds and shipping?

A sole proprietor starts Schedule C with gross business receipts, then separates customer refunds, the cost of goods sold and operating expenses. The net deposit from a marketplace cannot replace this calculation because the marketplace may have withheld fees or paid some costs for you (IRS: Schedule C instructions; IRS: What to do with Form 1099-K).

The IRS explains the receipts, returns and cost-of-goods-sold sequence and distinguishes taxes imposed on buyers from taxes imposed on sellers. Check the marketplace statement to see whether it collected and remitted sales tax; that question is covered in When you must collect sales tax.

How do inventory and cost of goods sold work for resale or dropshipping?

Goods bought for resale generally become cost of goods sold when sold, not simply when paid for. Under the regular inventory method, start with beginning inventory, add purchases and applicable acquisition costs, then subtract ending inventory. Unsold goods remain in ending inventory, including goods a marketplace holds for you (IRS: Publication 334).

For dropshipping, record the customer's full sale and the supplier's charge for the item separately. Shipping paid to bring merchandise into stock is part of its cost; shipping to the customer is a selling expense. If a supplier retains title until it ships directly to the customer, identify when the item becomes yours under your purchase arrangement before deciding whether it belongs in your ending inventory (IRS: Publication 334; IRS: Publication 538).

A qualifying small business may use a simpler inventory method if it clearly reflects income. The gross-receipts test for the page's tax year is average annual receipts of no more than $32,000,000 over the prior three tax years, with other conditions such as the tax-shelter exclusion. One permitted method treats goods as nonincidental materials and supplies. Their cost enters cost of goods sold when the goods are provided to customers or when the cost is paid or incurred under the seller's accounting method, whichever is later. A seller using its books-and-records method must apply that method consistently; changing inventory methods may require Form 3115 (IRS: Section 471(c) final regulations; IRS: Schedule C instructions; IRS: Publication 538; IRS: inflation adjustment).

Do I owe self-employment tax on selling profit?

A sole proprietor may owe self-employment tax as well as income tax when net earnings from self-employment reach $400. Use Schedule SE to calculate it; the general rate is 15.3%, with a Social Security earnings limit and possible other Medicare rules (IRS: Self-employment tax).

For a partnership seller, whether a partner's share is subject to self-employment tax depends on that partner's role and the type of income; review the Schedule K-1 and Schedule SE instructions. A gain from selling a personal item is generally reported as a capital gain, not as selling-business profit (IRS: Form 1065; IRS: What to do with Form 1099-K).

Do I need to pay estimated tax during the year?

An individual seller or partner may need estimated payments if expected tax after withholding and credits reaches $1,000 and withholding and credits fall short of the required payment based on current- or prior-year tax. A seller with no tax liability in the prior year is exempt if they were a US citizen or resident all year and that tax year covered 12 months. Count both income tax and self-employment tax in the estimate. More withholding from another job can reduce the payments needed (IRS: Publication 505).

Use Form 1040-ES to calculate payments. Installments are generally due April 15, June 15, September 15 and January 15 of the following year, or the next business day when a date falls on a weekend or legal holiday; see the form for rules on uneven income. An underpayment can bring a penalty even when the full return balance is paid on time (IRS: Estimated taxes; IRS: Publication 505).

Can warehouse inventory create another state's income tax duty?

Yes. Goods you own in another state's warehouse can create a state filing duty even if the marketplace collects sales tax. Public Law 86-272 limits state taxes based on net income when in-state activity is confined to protected solicitation of orders for tangible goods; it does not remove other taxes or filing duties (15 USC 381; California FTB: Doing business in California).

California's guidance treats a seller's stock in marketplace fulfillment centers as activity outside that protection. Its example does not decide another state's filing rule. List each warehouse state and the dates and value of inventory there, then check that state's rules for the seller's entity type (California FTB: Publication 1050; California FTB: Doing business in California).

What records should I keep?

Keep enough records to reconstruct gross sales, taxable gain, goods cost and each deduction, and to explain differences from every Form 1099-K. The IRS permits a recordkeeping system suited to the business if it clearly shows income and expenses; keep supporting documents as long as needed to prove return items (IRS: Recordkeeping).

• Download each platform's transaction and annual tax reports, each Form 1099-K, and payment-card statements.
• Save orders, refunds, fee statements, customer shipping charges and postage receipts; mark transfers between your own accounts so they are not counted as sales.
• Keep supplier invoices, freight charges, beginning and ending inventory counts, and records of goods held by each warehouse or dropship supplier.
• Keep purchase evidence for personal items sold, especially when a reported sale was below cost.
• Reconcile platform gross payments to your books and bank deposits, then explain each difference before filing.

Example

Illustrative US dollars. A sole proprietor sells goods for $50,000, including $2,000 charged to buyers for shipping. The marketplace pays out $42,000 after withholding $3,000 in fees, $2,000 in customer refunds and $3,000 in postage it paid for the seller. The seller's beginning inventory is $5,000, purchases and inbound freight are $25,000, and ending inventory is $8,000.

Schedule C starts with $50,000 of gross receipts, subtracts $2,000 of refunds, and deducts $22,000 of cost of goods sold ($5,000 + $25,000 - $8,000). The $3,000 of marketplace fees and $3,000 of customer postage are separate expenses. That leaves $20,000 before any other expenses. The $42,000 payout is neither gross sales nor profit. The seller checks income tax, self-employment tax and estimated payments using the full return, not the payout alone.

Different for you?

• A state should have received sales tax: see Catching up on uncollected sales tax.
• You have a selling loss or the activity may be a hobby: see Business losses.
• You sell through an LLC or are considering one: see How LLCs are taxed.
• You live outside the US: see When foreign owners owe US tax.
• You live in Canada and hold stock in US warehouses: see Canadian sellers with US inventory.
• Your platform and inventory records are behind: see Catching up on overdue books or bookkeeping support.
• You hold stock in several states or have several marketplaces: map warehouse locations and reconcile each platform before filing; bookkeeping support can help organize those records.